Kraft Foods to Split Into 2 Entities, Keeping Oreos but Not Velveeta

By MICHAEL J. DE LA MERCED

Published: August 5, 2011

After years of mergers and takeovers, Kraft Foods is undertaking its biggest deal yet: breaking itself apart.

The food giant said on Thursday that it planned to split into two businesses. Kraft will spin off its North American grocery business - home to familiar brands like Velveeta, Kraft macaroni & cheese and Oscar Mayer meats - to its shareholders. It will hold onto its global snacks business, with brands like Oreos, Cadbury and Trident.

By cleaving itself in two, the company is essentially letting shareholders choose between the fast-growing snacks business or the grocery business, which generates a lot of cash and enjoys strong profit margins despite its lower growth.

Dividing the two will also allow each business to pursue its own investment strategy. That could mean the grocery spinoff seeking out more brands from which it could reap cost savings, while the snacks business could continue its push into new markets.

The move occurred after some shareholders pressed management for years to act to lift the company's market value. They were frustrated that growth in Kraft's snacks operations was consistently weighed down by the groceries unit. One activist investor had contemplated publicly calling on Kraft to reorganize its businesses later this year, according to a person briefed on the matter who requested anonymity because the plans are private.

Kraft's plan follows a number of other companies that are breaking up, including Sara Lee, Fortune Brands and ConocoPhillips. But Kraft's is the biggest, creating a snacking business with about $32 billion in annual sales and a grocery company with $16 billion in sales.

Its split would follow a rash of deals that Kraft has undertaken since fully spinning off from the Altria Group in 2007. Under Irene B. Rosenfeld, its chairwoman and chief executive, the food giant has sought to remake its store of household brand names, including buying Cadbury and Danone's biscuits unit and selling off Post Brands and its North American frozen pizza business.

''This is something that we've been studying for some time,'' Ms. Rosenfeld, said in a telephone interview. ''This is a logical step that comes after the actions that we've taken over the last several years.''

It was last year's $19 billion acquisition of candy maker Cadbury of Britain that gave Kraft's snack business sufficient scale to be a stand-alone company able to compete against the likes of Nestle and PepsiCo.

At the time, Kraft's biggest shareholder, Warren E. Buffett, had some unusually harsh and public comments on Kraft's management, calling the Cadbury deal ''dumb.'' On Thursday, however, Mr. Buffett told two business television programs that he supported the split, adding that that he first learned about Kraft's plans over breakfast with Ms. Rosenfeld in his hometown, Omaha.

Shares of Kraft initially surged on Thursday before they were caught up in a broad and powerful stock market downdraft. For a while, the stock was the only component of the Dow Jones industrial average to show a gain. But it ended the day down 1.5 percent, at $33.78. Kraft shares have risen 15.3 percent over the last 12 months.

Kraft, which is based in Northfield, Ill., had considered alternatives to the split for years, including selling off various businesses, according to people briefed on the matter who requested anonymity because the discussions were private. But a breakup of the company was seen as the most tax-efficient way of slimming the food conglomerate. That process picked up speed over the last three months, these people added.

The decision was announced on the same day that Kraft released its second-quarter earnings, which at 55 cents a share narrowly beat analyst estimates.

''The strategic rationale for such a move is strong,'' Alexia Howard, an analyst with Bernstein Research, wrote in a research note on Thursday. ''Given the different investment priorities and growth trajectories of the two businesses, it makes a lot of sense to separate them.''

Robert Moskow, an analyst with Credit Suisse, put it more succinctly in his own research note: ''Kraft beats and breaks up. Brilliant!''

This is a more complete version of the story than the one that appeared in print.

PHOTOS: Irene Rosenfeld, Kraft's chairwoman and chief executive, said, ''This is something that we've been studying for some time.'' (PHOTOGRAPH BY JACKY NAEGELEN/REUTERS); Kraft will hold on to its snack food brands like Cadbury. (PHOTOGRAPH BY MATT CARDY/GETTY IMAGES)